China reaction: Disappointing inflation figures but signs of recovery emerge

Consumer prices undershot in March

China’s Consumer Price Index (CPI) inflation came in below expectations at 0.1% year-on-year in March (AXA IM: 0.5%, BBG: 0.4%), down from 0.7% in February. On a monthly basis, it declined by 1.0% from an increase of 1.0% in February, reflecting the diminished seasonality support from Lunar New Year festivities. Food prices dropped by 2.7% yoy (February: -0.9%). After a brief rise of 0.2% in February, pork prices returned to negative territory in March, falling by 2.4% compared to March last year. Core CPI (excluding food and energy) slowed to 0.6% yoy in March, from 1.2% in February. Price increases for services moderated to 0.8% from 1.9%, while prices for consumer goods fell by 0.4% from -0.1% in February.

As expected, February’s firmer prices were short-lived. But the faster-than-expected fall in March raised fresh concerns over China’s deflationary economy. However, there are some bright spots. As the base effect from February’s Lunar New Year holiday fades, tourism and overall entertainment prices eased but remained inflationary territory. Moreover, the post-pandemic reopening tailwinds in 2023 may have also weighed on this year’s prices. Additionally, pork prices -- which have been heavily weighing on headline CPI in recent months -- showed some sign of stabilising despite re-entering negative territory, as culling of breeding sow supply continues.

China enjoyed a three-day holiday for the Qingming Festival last week. High-frequency data revealed the first improvement in tourism revenue per visitor since 2019, implying slow but recovering consumption and consumer sentiment. That said, the economy still requires further progress on broad consumption to emerge from its low-inflation environment. We currently foresee China’s CPI inflation averaging at 0.6% yoy for 2024.

Global commodities price uptick failed to reverse deflation in China’s PPI

Despite March’s 3.0% monthly increase in global commodity prices, led by higher oil prices, deflation in China’s Producer Price Index (PPI) persisted. It edged down by 2.8% on an annual basis (February: -2.7%), marking its 18th consecutive deflationary month. On a monthly basis, headline PPI declined at a slightly slower pace, by 0.1% (February: -0.2%). PPI in producer goods declined further by 3.5% yoy from -3.4% in February, while consumer goods PPI decreased by 1.0% yoy from -0.9% in February.

The ongoing slowdown in China’s property sector has weighed on the factory prices of ferrous (iron-based) metals manufacturing. Furthermore, gradually recovering but still weak consumption has continued to put pressure on factory prices for overall downstream capital and consumer goods. Further policy measures are needed to stabilise the property sector and stop the drag on PPI. We expect future support will lean towards the supply side, such as greater loan issuance via China’s pledged supplementary lending (PSL) facility for public housing development as well as liquidity support to property developers via large banks to help the delivery of unfinished projects.

Monetary policy stance to remain easy

Although this month’s inflation figures brought disappointment, we saw early signs of consumption recovery and expect firmer inflation readings in the coming months. Nevertheless, to sustain the positive momentum seen in domestic demand, the policy stance needs to stay proactive. Even though we do not foresee Beijing directly supporting the household sector, monetary policy is expected to remain easy and supportive. We expect PBoC to reduce RRR by 50bps in the coming months (it currently stands at 7%), and a future policy rate cut will be more feasible after the Federal Reserve begins to ease monetary policy, now expected to occur in the third quarter of this year.